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ETFs in Focus on Increased Tensions in Saudi Arabia

Oil prices gained as Saudi Arabian crown prince Mohammed bin Salman looked to tighten his grip on power by ordering a crackdown with arrests of royals, ministers and investors. Increased tensions with Iran, as a missile was fired toward Riyadh last weekend, also contributed to oil’s gain.


However, Saudi stocks suffered as a result of this. The crown prince’s crackdown on corruption and war-related tensions led to investor pessimism and hit the stock markets. Stocks pared some losses as investors digested the stream of events and became optimistic about the crown prince’s commitment to reform and end corruption. However, a lot of uncertainty still exists in the region.


Crackdown on Corruption and Succession to Power


The 32-year-old prince ordered arrests of multiple officials, princes and businessmen in a supposed drive to end corruption. Per a Forbes article, among those arrested are billionaire investor prince Alwaleed bin Talal, the head of Saudi Arabia’s national guard and son of the previous king, Prince Miteb bin Abdullah, and dozens others.


However, it is still unclear if the move is actually aimed at ending corruption in the country or at consolidating power by eliminating potential challengers. The sudden arrests may be an indication of the crown prince’s attempt to expedite his succession to the throne before his father’s death.


Moreover, in a landmark move in September, the crown prince passed a law permitting women to drive and obtain licenses. Women will no longer need the permission and presence of a guardian in order to drive. Moreover, women will also be allowed into sports stadiums. This move seems like Salman’s aim to liberalize the economy and gain popularity in the west as a liberal leader.


Geopolitics


Last weekend, Houthi forces in Yemen fired a missile toward Riyadh’s international airport. The missile was intercepted midway and debris landed near the airport.


“We see this as an act of war,” the Saudi foreign minister, Adel Jubair, told CNN. Saudi Arabia accused Iran of providing necessary support to the rebels. "This is a very, very hostile act," he said. "We have been extending our hand to Iran since 1979 in friendship, and what we get back is death and destruction."


This provoked Saudi Arabia to close borders and ports with Yemen in order to stop Iran’s penetration into Saudi Arabia.


However, Iran denied these accusations. Bahram Qassemi, spokesperson for Iran's foreign ministry, said, "Yemeni response is an independent one and a result of Saudi Arabia's aggression, one which is not carried out or provoked by any other country".


Let us now discuss a few ETFs focused on providing exposure to the gulf nation (see all Africa-Middle East Equity ETFs here).


iShares MSCI Saudi Arabia Capped ETF KSA


This fund focuses on providing exposure to companies based out of the Saudi Arabia.


It has AUM of $17.8 million and charges a fee of 74 basis points a year. From a sector look, Financials, Materials and Telecommunication Services take the top three spots, with 38.9%, 31.9% and 7.0% allocation, respectively (as of Nov 3, 2017). From an individual holdings perspective, the fund has high exposure to Saudi Basic Industries, Al Rajhi Bank and National Commercial Bank with 15.3%, 10.5% and 8.0% allocation, respectively (as of Nov 3, 2017). The fund has returned 15.0% a year and 0.1% year to date (as of Nov 6, 2017). KSA has a Zacks ETF Rank 4 (Sell) with a Medium risk outlook.


Let us now compare the performance of the fund to a broad middle east ETF, GULF.


WisdomTree Middle East Dividend Fund GULF


This fund is a relatively less-popular equity ETF that focuses on providing exposure to the dividend-paying equities of Middle Eastern nations.


It has AUM of $15.6 million and charges a fee of 88 basis points a year. From a geographical perspective, the fund’s top three allocations are to Saudi Arabia, United Arab Emirates and Qatar with 25.9%, 23.5% and 20.2% exposure, respectively (as of Nov 6, 2017). From a sector look, Financials, Telecommunication Services and Real Estate take the top three spots, with 49.0%, 17.5% and 10.8% allocation, respectively (as of Nov 6, 2017). From an individual holdings perspective, the fund has high exposure to Emirates Telecom Corp, Saudi Basic Industries Corp and Mobile Telecommunications Co, with 5.7%, 4.9% and 4.4% allocation, respectively (as of Nov 6, 2017). The fund has returned 7.9% in a year and 2.3% year to date (as of Nov 6, 2017). GULF has a Zacks ETF Rank 3 (Hold) with a Medium risk outlook.


Below, is a chart comparing the year-to-date performance of the two funds.


 
Source: Google Finance


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WISDMTR-ME DIV (GULF): ETF Research Reports
 
ISHARS-MSCI SA (KSA): ETF Research Reports
 
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